Climate Risk Assessment of the Sovereign Bond Portfolio of European Insurers

Stefano Battiston, Petr Jakubík, Irene Monasterolo, Keywan Riahi and Bas van Ruijven

No 15, EIOPA Financial Stability Report - Thematic Articles from EIOPA, Risks and Financial Stability Department

Abstract: In the first collaboration between climate economists, climate financial risk modellers and financial regulators, we apply the CLIMAFIN framework described in Battiston at al. (2019) to provide a forward-looking climate transition risk assessment of the sovereign bonds’ portfolios of solo insurance companies in Europe. We consider a scenario of a disorderly introduction of climate policies that cannot be fully anticipated and priced in by investors. First, we analyse the shock on the market share and profitability of carbon-intensive and low-carbon activities under climate transition risk scenarios. Second, we define the climate risk management strategy under uncertainty for a risk averse investor that aims to minimise her largest losses. Third, we price the climate policies scenarios in the probability of default of the individual overeign bonds and in the bonds’ climate spread. Finally, we estimate the largest gains/losses on the insurance companies’ portfolios conditioned to the climate scenarios. We find that the potential impact of a disorderly transition to low-carbon economy on insurers portfolios of sovereign bonds is moderate in terms of its magnitude. However, it is non-negligible in several scenarios. Thus, it should be regularly monitored and assessed given the importance of sovereign bonds in insurers’ investment portfolios.

Keywords: insurance; climate risk; sovereign bonds (search for similar items in EconPapers)
JEL-codes: G11 G12 G22 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2019-12
New Economics Papers: this item is included in nep-agr, nep-env, nep-ias, nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Published in Financial Stability Report, EIOPA, December 2019, pages 69-89

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